AB Volvo (publ)

Ladies and gentlemen, my name is Claes Eliasson and I want to wish you welcome to this press conference and this meeting covering the first quarter 2021. We will, as usual, be listening to a presentation by the Volvo Group President and CEO, Morten Lammstedt, followed by a presentation by Chief Financial Officer, Jan Ytterberg. When done, we will open the line for a Q&A session where it would be sweet if you could limit your questions to two in order to make more room for as many of you as we can. All right, the ground rules are set. And by that, Morgan, I will hand over the presentation to you.

Thank you, Claes, for that. And also from my side, welcome then to this call covering the quarter one performance of the volvo group and this has been another quarter that has really been characterized by both performance and transformation by the group performance of course what we see and you have probably seen that in the report also a strong customer demand both on new and used vehicles as well as services As we have also communicated, following that very strong demand that we have experienced certain supply constraints and stop days on the truck side and a little bit more also in quarter two that we will cover later. But despite the challenges, we deliver a record margin for the group and also seeing a strong development in all business areas, also including buses. I have to say that is very much related to the restrictions on travels, et cetera, but when it comes to the cost control. On transformation, continue to be forward-leaning, taking a number of very important steps when it comes to partnerships in areas where we are complementing, we have complementing strength in order to do the transformation into fostering free and more safe and productive transportation systems. So I have to say, and I think I speak for all of us that are in the room here, Jan and Jan and myself, and Christer and Claes, I mean, there is There is not a dull moment in this industry. There is always something happening. But from that perspective, of course, the underlying trends here are very positive. So if we go to the summary of the quarter, as I said, high activity levels among our customers and thereby also a strong underlying revenue growth of 13% if you take away currency effects. Just an operating margin increase with 4.8 percentage points to a record level of 12.6. Just maybe out of curiosity, it was 12.5% in quarter two of 2019. And we also achieved a strong cash flow, normally rather weak quarter one, but strong here with almost 6 billion positive. And the return on capital employed of 17%, of course, then 12-month rolling, including the very weak quarter two last year, and a rich balance sheet in 2020 also. But also, as I said, we have continued to pave the way for the transformation of our industry through a number of important steps, strategic partnerships, but also launches of new products. Partnering with outdoor innovation of hub-to-hub autonomous solutions in U.S., complementing our already strong partnership with NVIDIA. Partnering with Daimler on fuel cell and the hydrogen economy, also important to complement the battery electric executions, our joint venture operational now. And also, of course, the very important strategic alliance with Isuzu also, following the transfer of UD Trucks into Isuzu, where I have to truly thank our, I have to say, previous colleagues, but future partners in UD Trucks also for a fantastic job over the last years and quarters, handing over UD Trucks in good shape, strong momentum, and thereby also forming a very good platform for the future together with Isuzu. When we look into the deliveries of trucks, it was growing with 16% year-over-year, with strong developments in all regions, and not at least with a positive momentum in the imported regions for the group of Europe and North America. Volvo Construction Equipment also had a very strong quarter, deliveries of 31,000 units, of course, very much on the back of the spring season in China, but also that we see dealers in Europe and North America gearing up for their spring season that is now occurring in quarter two. And deliveries were up with 53% year over year. Then we also have some highlights and a historic milestone for our industry. Following our ambitions and announcements on the capital markets day where we have been talking about the importance of transformation, that we are getting everyone on board and that we are transparent about how the movement into fully electric vehicles and equipment are going. uh we are from now on disclosing orders and deliveries on full electric equipment to bring transparency of the ramp up and also to bring if i may say so positive pressure to all of us when it comes to this very important transformation it's about uh of course us together with customers and customers' customers, but it's also about the infrastructure built out, it's about the green generation of energy, it's about the grid capacity and other things. So here we really would like to put a stick in the ground now and talk about that in full transparency. In addition to these figures, we are also, of course, continuing to sell solutions when it comes to hybrid solutions, primarily on the bus side. And they are not included in these figures. That only relates them to fully electric vehicles and equipment. Then I can also mention, because I will talk about that later, that the Volvo Trucks side have just launched also the sales start of the heavy part of the heavy-duty segment for FH, FM and FMX. and we are already now opening the books even that we will start deliveries on the second half of next year and that is related to the fact that that it takes time to get with customers to really go through the the need of charging and infrastructure etc those figures are not included here because that they are more seen as letter of intent so far but we have very good interest and and also letter of intent activities in that sector. But here it is the commercial contracts, it is what we have in the order board, it is what we have in commercial deliveries and not pilot deliveries. So this is the serial production of our different ranges. And as you can see, Still relatively small figures but it will gradually become bigger and bigger for different segments and regions and again very important for all of us to be able to follow and to see that we are really doing this transformation and having a leading position. And we can also see that we have a positive development. I mean, year over year from nine to 171 units and also book to bill where orders are almost two times higher than delivery. So this will be a very interesting path to follow for all of us. We are super excited about it and great interest from customers. And I can say also the quoting activity is very high here. If we move to service sales, also another news. We have said also that we will include the financial services in our service sales. That is natural. We are gradually moving into business models. where more of the sales will be done as equipment as a service in the coming years, and therefore we are including financial services, since that is a very important part of the complete deal, not at least linked to the move into electromobility autonomous solutions, where you have the abatement between equipment, energy costs, repair and maintenance, and the whole, so to speak, structure when it comes to cost per kilometer or when it comes to monthly installment or what have you. So we think that it's also giving even better transparency in our journey towards the service targets that we have in the group. During this quarter, service sales grew with 5% adjusted to currency, which is again reflecting the high activity level among customers. We have had also on this side, of course, strange supply chains, but the organization is continuing to handle that way well together with our customers, because truck and machine utilization is on par or above pre-COVID-19 levels. And we are also continuing to focus on increasing service contract penetration and duration. The bus and coach business continues to be severely hit, as we said, by the pandemic related to the extensive travel restrictions, mainly done for intercity bus travels as well as for tourism segments. But as you can see, we see in Penta recorded very high increases of 12 and 20% respectively. Moving to trucks. The market situation, the forecast here is based, as you can understand, on current visibility on both demand and supply. And a strong order intake will make supply the decisive factor for some corporates, as we are now trying to meet the demand step by step. and in this situation we are keeping the forecasts unchanged in relation to what we reported in relation to the quarter four last time with the exception of china europe and north america we see a continued strong e-commerce trend people working and shopping from home there is a lack of truck transport capacity resulting in strong fleet utilization low inventories of used vehicles that further drives demand on new vehicles And it is, of course, still early days in 2021, and it's difficult to assess how the supply ramp up will be time-phased here now. We are currently not planning for any further adaptations of the plant production, as previously announced, but visibility is still low, of course. So our market forecast for both Europe and North America remains unchanged for the 290,000 for both regions. Brazil, we see an export boom due to the devaluation of the Brazilian real, but also, of course, record harvest in 2020. Better prices of raw material, very important for the Brazilian economy, and thereby transport needs. Forecast unchanged at a good level of 95,000. India, truck market continued to regain momentum on the back of increased freight volumes, infrastructure development, and pent-up replacement needs. could be disturbed, unfortunately, by the next wave of the pandemic in India, but the forecast remains unchanged also here. And as I said, in China, subsidies for replacement of vehicles with CM3 emission levels or lower than drove the heavy-duty market or heavy-duty and medium-duty market, I should say, to an incredible 95% growth in quarter one. And as a consequence, the forecast is upgraded with 140,000 units, up to almost 1.6 million units. Very strong book to build during the quarter. And, of course, reflecting again the high activity levels, orders increased with 126% year-over-year and deliveries with 60%. We see a particularly strong book-to-bill situation in North America and Europe, as you can see on the graphs here, resulting in an order book that is on all-time high level. As we have communicated also, this steep increase of demand, this very positive situation, have led to planned production increases in several steps that we have done, with more and more strained supply chains as a consequence. That is of course normal, but we have also seen that the semiconductor shortage has led to a planned two to four week production stop in beginning of Q2, and that is still the plan. We do not currently plan further stop days, but visibility is low. It has improved somewhat, but still low if you compare to normal planning horizons. And the gradual production increases that are needed to meet the very positive demand and to execute the order backlog is of course the highest priority and will continue to be a balance between production planning and supply situation to really utilize every single situation at the limit from a positive side. When it comes to market shares, in Europe, for Volvo and Renault, it was flat versus 2020. Volvo stayed at a good level of a little bit more than 17%, and Renault at 9%. And in North America, Volvo Trucks has gained share gradually to 10.3%, whereas the Mach is rather stable with 6.6%, a small decrease here in the beginning of the year. Mortgage share in Brazil was almost 21% compared to our normal levels of 22, 23%. And it's mainly related to low levels of ready trucks in the pipeline here of incoming inventory into the year. We have also in Brazil a very good order book and all focus here also is on executing. Australia coming in also with the same situation, low inventory into our vehicle operations and thereby long lead time but strong momentum. And for UD, as I said, we had a very strong finish by the UD team in the Volvo family context with increases across all key markets and not least in Japan with a market share of 17%, so very strong achievements. And finally, as I said, still relatively small numbers, but the electric heavy duty done about 16 ton market share in Europe. So heavy and medium duty market share in Europe is 53% combined for Volvo and Renault. We are also proud of several important news during the quarter in the truck segments. Broadening the electric offering in Europe into the upper parts of the heavy-duty ranges both for Volvo and Renault. As I stated, we have now started sales for FH, FM and FMX. That is really, so to speak, the core heavy-duty segments. We have the deliveries to start in the second half of 2022. Renault Trucks have also announced their roadmap for the upper part of the heavy duty segment with their electric product offering from 2023. And the potential is actually very interesting because when we look at our connected fleets and coverage on daily mileages and ranges, etc., We see with the right type of build-out of infrastructure, planning together with customers, we can actually, with those news now, cover up to 50% of the transportation need over the next couple of years here. And as I said, there is a broad customer interest for electric trucks in Europe, both from transport operators but also transport buyers. And we are really looking to... forward to continue to reduce together the CO2 footprint and to take the full benefit of this fantastic offering. Volvo Energy, as we have started to be operational during this quarter, will also play a very important role in this transformation. The fuel cell joint venture hydrogen or fuel cell electric vehicles and the development and production of the fuel cell stack together with Daimler under the joint venture name of Cellcentric. Also great start operational as from 1st of March. Very important signal obviously that it will be a very important complementing factor to battery electric and fuel cell electric vehicles in order to do the transformation. And Volvo Group also broadening the technology reach in autonomous vehicles by cooperation on the hub-to-hub on-highway applications with Aurora Innovation, complementing our strong collaboration with NVIDIA also. So we have a very strong setup now when it comes to autonomous solutions for different types of segments, regions, and customer applications. Moving into construction equipment, the forecast also here of course is based on current visibility on both demand and supply. But having said that, it is a very strong momentum in all regions. We have done changes to the market forecast since last quarter in a number of regions. For example, an increase of 5 percentage points in North America of the total market, 10 percentage points in South America, and 5% in Asia and 10% in China. Maybe as a comment on China, the Chinese market is currently difficult to assess due to the stimulus impact on the market size. quarter one was very strong again but we still estimate that the second half of the year similar to the track side will cool off and we also judge that to be healthy if that is happening to avoid a bubble given the very strong development that we have seen over the last quarters here On orders and deliveries, the same here. We see strong construction and infrastructure activities across regions and markets. VC had a positive book to build despite a strong increase of deliveries of 53%, of course very much related to China, but also in other regions. Also in these segments, there is a good fleet utilization among our customers and not at least in mining. As a result of the positive development, we have low dealer inventories and pipeline. And Volvo CE has not been as affected as trucks with regards to supply shortages of, for example, semi-conductors. Buses continue to be very difficult, impacted by COVID-19 with the restrictions on travels and tourism. But also in certain cities on the public transport systems, order decreased with 68% and deliveries with 26%. So the most impacted product segment is coaches with very low fleet utilization and also declining service businesses we talked about earlier here. But I have to say that Volvo Buses is doing a very good job keeping costs to a minimum, which will serve also as a good platform when we gradually will move out from the pandemic and restrictions will gradually be taken away here. Also an important order with the newest execution of the hybrid buses, the 7900 with S-charge. It's a very interesting self-execution. recuperating technology and also including with a very smart zone management system where you can decide for the zero emission zones and the zero noise zones etc so very innovative and promising and the first larger order here is for 64 buses to Belgium so again another important proof point Penta, the segments of marine, leisure, industrial, off-road in particular, but also to some extent in other segments, showed good growth. And in total orders, we did see an increase with 27% and deliveries with 7%. We are also in this segment utilizing the platforms and technologies and innovation of the group and doing specific adaptations to core segments of Penta. Here you see together with Pico, the largest terminal tractor fleet owner and operated in North America, where we are really working in close collaboration to develop the next step of emission-free and fully electric executions on terminal tractors. And on a final note, financial services also solid performance, resulted in record new business volumes for quarter one. Finance units on a 12-month rolling period exceeded 63,500 units, a great cooperation with all other business areas, as I talked about before, the importance of that. And the penetration for financial services 12-month rolling was 31%, and that is the highest rolling 12-month penetration ever. And we've also seen that the good activity level is resulting in improved customer profitability, stable portfolio performance with the lower rates of modifications, credit provisions and write-offs. So with that, Johan Ytterberg, I'll hand over to you for the financial update.

Thank you, Martin. So just another quarter with impressive leverage as volumes are high and cost control good. There were negative effects on deliveries and costs in this first quarter due to shortages in general, COVID outbreaks and restrictions, as well as weather-related issues in North America. The first quarter last year was, on the other hand, negatively affected by measures to halt the pandemic outbreak, and the lost days of production were on a similar level between the quarters. COVID-19 as such, in combination with supply constraints, called for a continued cost and cash Moving over to net sales for the group, they increased by 3%, but adjusting them for currency, net sales increased by 13%. The Swedish krona has appreciated against all major currencies compared to last year, but the weaker US dollar and Brazilian real affect more substantially, given a combined FX effect on net sales of close to 10 billion. And as a consequence of FX, As you can see, both North and South America had lower net sales despite increases of vehicle deliveries of over 20% and close to 15% respectively. Region Asia was positively impacted by the increased machine deliveries and partly to an improved truck volume. And China was the main contributor behind this. The first quarter last year, as you remember, was negatively affected by measures to halt the pandemic in China. If we move over to the group's earnings, high volume of vehicles and services in combination with good cost control, that is a prescription for strong earnings. The adjusted operating income increased some 4.7 billion to 11.8 billion, and we had a margin of 12.6%. And it is comforting to see that the substantial part of the improvement of earnings comes from what we can call own achievements, mainly related to cost, but also to prices and then mainly related to services on that side. and only to a minor extent actually comes from what we can call market-driven effects like the increased total market demand, and of course also we have a negative FX effect. The helping from raw material has so far had limited effect on earnings. Focus for us now going forward is to accelerate ambition and activities in certain areas like R&D while maintaining the cost discipline. There was a negative effect coming from market and product mix in the core remainder related to construction equipment, but also to Group Trucks and Penta. Headwind from FX continued and was some 1.1 billion negative this quarter, reflecting then once again the strongest Swedish Krona in general and the weakening dollar in Brazilian Real. FX transaction effect for the full year 2021 is now expected to be close to zero, provided present FX rates, and we do not provide forecast for the full FX on operating income for 2021. Moving over to the cash generation, as Martin was into it, first quarter is a seasonal weak cash flow quarter when working capital is being built up for a stronger second quarter as regards deliveries. Despite this, operating cash flow in industrial operation was 5.7 billion in the first quarter. Third quarter was negatively affected by shortages, which impacted inventory negatively. We saw a higher sequential machine deliveries, and of course that affected receivables negatively. but this was offset by increased payables reflecting the high production pace. We continue to be on historical low or very low inventory level on used vehicles. Naturally, net cash position in industrial operation, it was some 75 billion here in the end of the quarter, i.e. on the same level as the end of 2020, as the positive cash flow effect in the first quarter was offset by the payment for the shares for 50% of the fuel cell, Jones Ventures cell centric. Moving a little deeper into the segments then, starting with group trucks. So for them, yet another quarter at some 13% margin for group trucks, where all truck business areas contributed positively. Adjusted operating income, some $7.5 billion, an increase of $3.6 billion compared to the first quarter last year, despite the headwind from currency. And the same explanation of improved adjusted operating income as for the group was valid also here for our main segment, the group tracks. But beside improved volumes and good cost execution, we shall mention the improved JV income, mainly related then to downfall, which had a strong delivery quarter, whereas the first quarter last year was heavily affected by restrictions to halt the pandemic in China. Huge truck business have improved substantially across our truck brands and are now at historical good levels. The negative effect was related to a comparably lower share of Volvo branded trucks related to moderate increases of deliveries in Europe and South America, reflecting the halted production due to shortages in Europe and COVID restrictions in Brazil. The increase of heavy-duty vehicles was lower than the increase of medium-duty and light-duty vehicles, and that had an impact on product mix as well. Moving over to construction equipment, where we have a sharp increase of deliveries of 53%, mainly then related to STLG and Chinese market, even if we see increases across the regions. And that limited the increase of FX-adjusted net sales to 34%. The first quarter last year was negatively affected by the restrictions to halt the pandemic in China. That's why we see these big differences besides the strong market as such in China. Service demand and revenues continue to improve, reflecting the higher machine utilization. Besides the positive effect on earnings from higher volumes, the capacity utilization improved and the cost execution on indirect expenses impacted positively. whereas the mix impacted negatively with high Chinese deliveries where gross margins are lower than average and where the price competition is fierce. FX impacted negatively by 0.6 billion. An adjusted operating income increased from 1.1 billion to 3.8, giving a margin of historical high, 15.4% for being a first quarter. If we move over to buses, What I call the survival of the fittest race continues for the bus business, as demand still is hampered by reduced personal mobility around the globe, and bus fleets standing idle also here in the first quarter. This affects service revenues, and this affects deliveries of new buses, where the coach and tourist segments are especially hurt. And as a consequence, capacity utilization was low, but cost execution on selling admin and R&D was strong. So just that operating income was just below break-even for this quarter. And for Penta, demand and volumes of both engines and service continued to increase. For engine deliveries, this was related to the industrial segments, particularly in Brazil and China, whereas the increase in service volume was most pronounced in marine leisure segment and in North America due to the early start of the preparation for the boating season. The improved volumes together with good cost execution in R&D, selling and out being contributed positively, but were partly upset by a negative product and market mix. With more of lighter engines and more of sales in South America and Asia, as well as a negative FX effect of close to 100 million compared to the first quarter last year. All in all, an improvement of adjusted operating income of 135 million to 643 million, giving a historical good margin of 18.9%. And coming into the last segment, financial services, adjusting for currency. New retail financing and credit portfolio were higher than last year, as deliveries and market penetration on customer finance improved. Customer's payment ability and payment performance improved, and write-off levels were low, except for certain bus customers. And as a consequence, credit provision expenses were normalized here in the first quarter this year. Credit reserves for potential future credit losses is kept conservative and stable. In the first quarter last year, the credit provision expenses increased substantially, reflecting at that time the increased modification request and general uncertainty related to COVID-19. All in all, adjusted operating income improved from 75 million to 682 million. Besides the lower credit provision expenses, the portfolio growth contributed to the improvement, which was partly offset then by a negative FX effect of some 115 million. By that, Martin, I ask you to sum up.

I think we have gone through all the different things that we said, both as regards performance and transformation, a very important and big quarter for us. uh very proud to see that the organization is continuing to drive the agenda as we have decided to do together strong decentralization custom focus uh strong execution capabilities together while also having uh the eyes on the horizon or the transformation and leading that way also for society i think uh Just in summary, a strong and good quarter and very interesting times ahead. If I may say that in a humble way, we are proud.

All right. Thank you, gentlemen. Let's open the line for the Q&A session. And, operator, if you would be so kind to please let the first question flow.

Yes, thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. And our first question comes from the line of Hampus Engelao from Endals Banken. Please go ahead. Your line is open.

Thank you very much. Two questions from me. If we're looking at the second quarter with the planned production stops, Could you maybe talk a little bit about how you will handle, like, will you use time banks or will you take temps off or how to manage that? And also related to that question is what we've seen from some of the car OEMs is that they will continue to take deliveries from sub-suppliers given the risk and shortages we've seen during the beginning of this year and also for the rest of this year. And my thinking is on How will working capital develop for you guys in the second quarter? Will you continue to take the delivery even if you stop production in terms of spare parts? And then the last question is also related to this, and it's on the order bookings when we see this big book-to-bill and lead times, I guess, are creeping up here. Can you maybe talk about how you kind of risk test your order backlog and how to think about that going forward? Thank you.

Thank you, Hampus. I can say on the first question, when it comes to handling, as we have stated, the two to four weeks, depending on region and depending on assembly plant, etc., that is handled in different ways depending on what local contracts we have, exactly what you said about Time banks about other type of flexibilities and very much depending on where we are operating the world and I think that has been a good thing for us also when we looked about the situation coming up here that we took a deliberate decision to actually take a step back get things in order because that is getting better control of how you operate with this also and that is also relating to your next question meaning that Of course, we are continuing to make sure that we are, so to speak, filling up. That will have a certain effect, but we urge that to be very much under control and very important for us, of course, because, again, we have to reiterate the situation. We are in a positive momentum when it comes to orders. We have a strong order board. And of course, we would like to execute together with our customers as quick as possible and to maintain a good flexibility to meet that. But to do that in a controlled way, I think that is also based on... quite some years of experience for many of the leaders that it's better to do it in a controlled way. Don't panic in a very steep upturn. It's a normal situation that you will see supply constraints, but still also be fit both for services and for new products. And that is bringing me into the next one. I think one very important thing that we did during last year was going through the order book and started almost in quarter two And quarter three from zero again. So even if it has been filled up to a very high extent, we have also had the conversations, obviously, with the customers on how they look upon the deliveries and delivery lead times. But, of course, we know that this is a high priority to have a close look to the order book in relation to a strong order book when it's extended out in time. how certain different things are, but we feel confident about the methodology that we have.

What I can add on the working capital side, as I mentioned when we talked about the first quarter and production stops, et cetera, we already had an effect related to what you were mentioning, Hampus, on buffering of certain parts and components in that quarter.

All right. Thank you. Next question, please.

Thank you. Our next question comes from the line of from Citi Group. Please go ahead. Your line is open.

Yes. Hi, Martin and John. It's Claes from Citi. Two questions, please. Sorry, I was a little bit late on the call. There's a lot of things going on this morning, but maybe you touched on this already. Just on the bottlenecks again and the production levels, am I right to assume that in Europe and Brazil, visibility on final demand is better than in North America, and therefore we shouldn't see any major cancellation risk, and given the strong demand that you have out there, and that you might be able to catch up during the summer using the normal summer shutdowns on the lost production here in April. But with the information you have right now, Of course, it can change, but given the supply situation that you have now, Martin?

First and foremost, I should say that when we look to the order boards, including North America, as I just said also, Claes, I think we feel rather confident that the order books are quality control in a way that we had a good starting point and when we have filled we have been obliged also during the last quarters to have a very close discussions with our dealers and customers about the situation so there I think we feel confident about the order book quality as such then obviously when the order book is increasing with the pace it has been doing now it is highest priority as you said to execute on that And therefore, I think it's very important to come back to the fact that we were in a ramp-up mood, obviously. That is normal, then, that we are meeting certain supply constraints. It has been more obvious with this steep increase and with the coordinated uptick of a lot of sectors not only in mobility and commercial vehicles and construction equipment for example semiconductors and to that assumption I would say that we are of course not guiding on that more than saying that it felt very good for us to say also now that the decision that we took to to hold to get things in order is what we have planned for and we have not planned for anything more than that and now we are of course focusing on executing this as good and as quick as possible in an increasing market situation very clear very clear my second one is on

on dual production as you roll out the new battery range. And there is obviously a lot of interest from your customers. Will we see any margin impact from dual production? This has been a typical issue with the model changeovers across not only you, but other truck OEMs as you shift over. Just trying to think whether it's different in battery electric versus conventional when you do the model changeover.

uh i mean during this year you will not see any marginal effect given that the starting point was lower i think the more important thing for for us is to be very transparent on this ramp up where are we how does it look like what segments are seeing the first transition uh but also to speak the reactions and also to to really continue to push The whole society of doing this transformation now, because it's going quick, and we have a very good industrial setup, as we have discussed many times before, where we actually are adding these type of products into the ordinary footprint. the famous, as we have reiterated many times, fish bone structure where the pre-assemblies are coming in. So from that perspective, the industrial footprint is not very dramatic, and we are ready also to cope with these demands segment by segment, even by region. But we need to be realistic. The sales process is a little bit long at the start, and that is not only related to the fact that you would like to conceal the product in itself, but also to plan for depot charging and other type of means. But great interest and a historic day today that this is now up and running as a transparent part of the transformation.

Thank you.

Thank you. Our next question comes from the line of Tom Narayan from RBC. Please go ahead. Your line is open.

Yeah, good morning, Martin, Jan. Yes, Tom Narayan, RBC. Thanks for taking the questions. So, yeah, I mean, it appears that the lower selling expense at R&D costs did lead to a big part of the EBIT margin beat versus consensus expectations in the quarter. You know, if I apply Q120 selling at R&D expense I'm getting a margin of something like 10.5%. I know you can't really do that. That's not apples to apples. But, you know, that would be in line with consensus, just wondering how sustainable these lower selling and R&D costs are or will be in the rest of the year and beyond. And then next, you know, on hydrogen, you know, we are already hearing about big contract wins from fuel cell suppliers like Plug with Renault and Symbio, you know, the JV between Michelin and Parisia with Stellantis and Hyundai. It's interesting. Initially, I thought that OEMs like yourselves would be better advantaged here. But given that these suppliers are clearly making big wins, just wondering why wouldn't you and Daimler just use these suppliers to make fuel cells? Why do a JV just to make them only for yourselves? Presumably the suppliers might have better scale economics, you know, since you probably wouldn't make fuel cells and sell it to your competitors. Thanks.

This is Jan, I can start with sort of the indirect expenses and where we are and where we are heading. Of course, we took this crisis and we were going into a downturn, if we remember, at the beginning of 2020. So we already had plans to take down costs and it became even more imminent with the COVID-19 crisis. to reset the structure and start from a lower level. I think we have done that, and as I said in my short speech here, the focus for us right now is to be able to add on the ambition and activities in certain areas like R&D, but still maintain the cost in other areas, i.e. the indirect expenses on selling and admin, which is, of course, very important for us. So that is our task right now, and let's see how successful we will be. But right now, this is where we are with everyone back at work and working with the COVID-19 restrictions we have, of course.

And on the second one, thank you for that very important question. I know that we have two questions on the future here, which makes me extremely proud also. First and foremost, we are strong believers in hydrogen. fuel cells as a very important component with the battery electric vehicles, as I said, both are based on the same electric powertrain. But then you have different energy layers. And then obviously when it comes to commercial vehicles, you need also to look into what are the requirements of that type of fuel cell set. And when we did scout the opportunities, we did found the technologies that we are now having in the joint venture, the leading one when it comes to performance. when it comes to the modularity of the building into commercial and heavy applications that we have in our group, when it comes to scaling of production for that type of applications that we are sitting on, but also that two of the world's biggest competitors are actually partnering on the development and production of the fuel cell stack is a strong signal that this is part of the future. that can bring volumes and we have been very clear about that also that cell centric is open for any one to actually be buying and sourcing their equipment so we are anticipating a great opportunity that others will actually uh also source from cell centric we have already uh mpu overall on for that one of uh We believe this is a great setup. It will bring competitiveness, and we think that it's also a core component for our system thinking when it comes to fuel cell electric and the whole service solution. So we are very confident about this setup.

Okay, thank you. We'll turn it over.

Thank you. Our next question comes from the line of Olaf Sederholm from ABG. Please go ahead, your line is open.

Hi, it's Olaf from ABG. I wanted to talk a little bit about the order intake. It continues to be at an extremely high level. Europe was amazing. Can you elaborate a little bit more on particular Europe? Could there be any sort of pre-ordering going on ahead of sort of worries about component shortage and increasing lead times and and and also on a general basis um are there open production slots for q3 still or are you now taking orders for q4 or how does it look on that in that respect thank you thank you

no i mean as always obviously you need to be cautious and work close with both dealers and customers when you have a very steep uptick in the situation we are into now but in all these type of situations as you have to be very close also when you you see a cooling off situation as i started to say We had a good starting point because we had really worked with the order board, and we had to work with the order board in 2020. And therefore also now when we have been refilling, we have had conversations because we did see quite early also that lead times were pushed out in time, et cetera. So therefore also planning together with customers, how can we do it in a fair way and meet the different demands depending on what situation you have in regional customer, specific customer cases, et cetera. But you should never exclude that risk, obviously, when you have very strong momentum in the market. So that is something that we'll continue to have an eye on. And then when you talk about quarter three and quarter four, I should say quarter three, absolutely, it is full. And obviously, we can do some re-education in order to solve specific issues. But in principle, it's full and a large part of quarter four is uh as well so so uh here is also how we are handling uh yeah called the forum and onwards obviously together with leaders and customers so so again as we said very positive momentum and and thereby also a high focus of meeting this demand in in a good and good way here step by step very good um thank you very much and and also on the

On the electrification, you continue to roll out new products, and we're happy to see that you're also going to disclose it on a quarterly basis. We're still talking about fairly low volumes. From your customer conversations, do you sense that the market is

of rapidly moving towards slightly larger volumes um or do we need to see the extended product range come out fully for some time before that happens i think there are of course different dynamics and i think you will try to say that it's fairly small warnings i think it's small volumes still but having said that i think you need to see it in these different steps i mean What are deliveries? And number one, it is serial deliveries, which I think is a good thing that it's not something that is built in a prototype workshop or something. It is starting to be integrated in our normal industrial system. Number two, the order activity, what is really coming in as, so to speak, commercial real orders. And then we have, as I said, number three step is the pre-booking, where we have a lot of conversations with the customers. We see that different actors are also disclosing the pre-bookings. We think it's better to say that we have a high activity level there and then of course all the conversations and quoting activities we have and then to your point how rapidly it will come uh i think we can go back to the capital markets day and say that we see the dynamic will happen so to speak segment by segment region by region depending on on the dynamics for example in city applications in in in in regions where you have the right dynamics in terms of taxes, infrastructure, customers or consumer pull and demand, when the transition starts to happen, it will go rather quick from low levels up to the majority. And then that will gradually then build up the cumulative curve. And by the way, Olof, that is one of the reasons why we are disclosing it so we can start to discuss around this transformation segment by segment and region by region. So I think we have all reasons to come back to that and discuss how is that dynamic happening. But I think one thing is sure is that In the starting point, obviously, this is B2B. You want to feel that you have a strong partner as a customer to work with when you start to do the transformation and feel sure that you have been thinking right about infrastructure, surveillance, education, repair and maintenance thinking, financing, et cetera, residual values, battery second life, et cetera. But once you have done a number of views here, you will feel confident, okay, now I'm familiar with this structure, and that we already see because a lot of the medium-duty customers that we are getting into the pipeline also sitting on heavy-duty applications and are then part of the pre-booking or the letter of intent type of discussions because you have started in one segment and you see that you can cover new segments in your fleet.

Many thanks. Much appreciated. Thank you.

Thank you. Our next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead. Your line is open.

Hi, good morning. Thank you for taking my question. I'll start one following up on the electric vehicle side. Very helpful disclosure today. I guess to sort of round up the EV topic, can you give us an idea of where ASPs are tracking at the moment versus the ICE and the trajectory you expect? Sort of when would we reach parity? And then I'll ask the second question afterwards.

Thank you for that question. Also, that I think is a very good and relevant question. If you just look at the pure ASP, obviously, it is... a higher purchase price if you do it alone. And that's the reason why we talk more and more about equipment as a service in this transformation, because for the customer, what matters is that, in a way, if you put it really simplified, higher price up front, but lower operational cost. And, I mean, the whole thing about that parity will come of different factors and cities. It will not only play out in the TCO. It will play out also with taxation incentives even prohibitions to go into city centers or that you really would like as a transport buyer to to get your needle moving on your own sustainability journey we see a lot of the transport buyers that have done a lot of things in there so to speak, warehouses or stores or whatever, but logistics will play a very important role. And there is a readiness also to actually pay a little bit more for this to get the CO2 functionality or the non-CO2 emissions to get lower noise and to be, so to speak, driving that agenda. So I think what is interesting is that both with the volume increases, with the battery developments, and with a better understanding together how does it look like when it comes to cost per kilometers, segment by segment, region by region, city by city, and that is the modular approach we are taking. So, again, with the disclosure, our intention is that we can be very transparent and discuss this transformation together with U.S. investors so you feel confident that, first and foremost, that we are driving the agenda, and secondly, that you can follow that as well.

Thank you. And then maybe more of a shorter-term question regarding following up on the topics of shortages. I mean, there's shortages, but there's still very good demand, as you flagged. So what is the opportunity set for pricing into the second half and to maybe sort of plan your deliveries based on best mix customers, best ASP customers?

No, of course. In a market like this, there's a good environment for price increases. And of course, we also have to do that because we have price cost increases coming into the system in several areas. So this is needed and it's ongoing. So right now, the prices are stable, slightly positively. And of course, that is also related to the fact that we have some new products on the Volvo brand side that we have launched.

And, I mean, obviously, as you said, when it comes to the mix, et cetera, we are looking at that. At the same time, I think it's extremely important to understand that we are a B2B company with long-lasting relation with our customers. We are sticking to our customer base, and we are not opportunistic because If you do that to a short-term site, you have to, so to speak, you risk to eat up that later. So, of course, as you all said, it's more about the price execution and such than to be too selective on the customer base because we like our customers, we have long-lasting relation, and that is the strength of the group and of all our brands.

Thank you. Thank you. Our next question comes from the line of Rob Wolfhammer from Mellius Research. Please go ahead. Your line is open.

Good morning, and thank you for taking the question. My question is on autonomy, and I wonder if you can give us any update on the strategy and whether the Aurora relationship is indicative of internal efforts with NVIDIA being not as advanced or whether we should expect OEMs to broadly partner with autonomous companies. And finally, in your investor day, I think you mentioned the autonomous revenue per life cycle of the vehicle is quite attractive. Does that hold if you do relationships as with Aurora? Thank you.

Thank you for that question. Very appreciated. First and foremost, yes, I think that you will see a complementary landscape, a little bit depending on what type of application we are talking about. Obviously, we sit with very good model knowledge when it comes to the redundant base vehicle or base equipment that is prepared and ready for autonomous capabilities when it comes to all the redundant systems, when it comes to acceleration braking. cooling, what have you. And then when it comes to, so to speak, the virtual driver capabilities, depending on what type of segment, what type of region, what type of legislation, we see that it is good with our modular setup to be able to plug in, so to speak, different capabilities as we are doing with NVIDIA. For the semi-confined, for port terminals, for their basic, so to speak, capabilities when it comes to processing capabilities. As well as we see with our roller that is highly specialized and very forward leaning. And we have found that also when we have done both the utility and the process together with them, very highly complementary. with our virtual driving capabilities together with our, so to speak, redundant base vehicle capabilities of that specific application. Having said that, when it comes to the business models, yes, it is very attractive because obviously for the applications we are talking about, there is a big gain to be realized. Of course, when it comes to the cost of of driver, but even more importantly, we see in many areas also how you can all the time optimize, so to speak, the behavior of the truck when it comes to acceleration, braking, wear and tear, et cetera. And in addition to that, obviously, that you are thinking through the system together with the operator, how do you get the continuous flow in your logistics operation. So very attractive to see that longer contracts, deeper relations. And I will not go into detail, obviously, because we will keep that for ourselves. But the revenue model is, as we see it, very attractive, win-win-win. And I talk about the customer and the parties involved in a smart way where all the gains have a good upside for the parties involved. And that, I think, is the dynamic that you should have, both when it comes to CO2 execution, cost per kilometer, and the safety, not at least also, that is super important. So... Excited about that.

All right. Could we please have the last question then?

Thank you. Our next question comes from the line of Nicolai Kent from Deutsche Bank. Please go ahead. Your line is open.

Hi, it's Nicolai Kent here from Deutsche Bank. Thanks for taking my question. My question would be just, again, a follow-up on the electric trucks. And as you already touched on the semi-shortage, And as you're ramping up electric trucks, do you see a similar shortage for battery cells? And could be there more room for cooperation?

Yeah, thank you for that question. I mean, what we see obviously is that we are working very extensively now, if I may say so, with the new supply chains or not necessarily new, but the supply chains that will be ramped up in relation to electric mobility and thereby strengthening our partnerships, visibility and how we are cooperating. As we have earlier announced, for example, our strategic alliance with Samsung SDI on the battery cells, but also that we have long-lasting partnership with others also in the areas of pack and modules, etc. So exactly, as you said, I mean, also relating to the electronic units and components, not relating only to batteries, but also to The electric pieces of the powertrain as such is of high importance now when we are gradually ramping up. And to have that smooth ramp up also fitting into our industrial system. So high priority on that. But we have a good setup as we feel.

Thank you. Very clear.

Thank you. Excellent. This concludes the call for the first quarter 2021. We are all looking forward to meet you in three months' time again. So bye for now. Over and out. Thank you. Thank you. Thank you.